A subsidiary of Imperial Tobacco Group PLC has entered into a purchase agreement with Reynolds American Inc. for the acquisition of assets, including a portfolio of U.S. cigarette brands, Winston, Maverick, Kool, Salem and U.S. and international e-cigarette brand blu, plus the national sales force, offices and production facilities currently owned by Lorillard Inc.
The assets are to be acquired for a consideration of $7.1 billion following the proposed acquisition of Lorillard by Reynolds.
Martin Orlowsky, former chairman, president and CEO of Lorillard, has been appointed executive chairman designate of the enlarged U.S. business.
The Acquisition requires U.S. anti-trust approval. This approval process is likely to take a minimum of 6-9 months.
On completion of the Transaction, Imperial will acquire:
• Cigarette brands in the U.S. currently owned by Reynolds, comprising Winston, Kool and Salem.
• A cigarette brand in the U.S. currently owned by Lorillard, Maverick.
• The e-cigarette business currently owned by Lorillard, consisting of blu in the U.S. and UK.
• The infrastructure and factory currently owned by Lorillard at Greensboro, North Carolina.
The Transaction will include a series of interlocking supply and transitional agreements between the enlarged Reynolds and Imperial in relation to continuity of supply of the acquired brands, their visibility at the point of sale and the route to market for the acquired business. The key terms of these agreements have been agreed, and further details will be included in the circular to shareholders.
“This is a great opportunity to transform our U.S. business and secure a significant presence in the world’s largest accessible profit pool,” said Alison Cooper, chief executive of Imperial Tobacco. “We plan to build a U.S. brand portfolio through national distribution and create a stronger, more competitive business. We intend to internationalize blu, the U.S. leader in e-cigarettes and enhance its growth opportunity with our know-how. We expect opportunities for cost optimization through integration. The acquisition of these assets, without historic product liabilities for the cigarette brands, on reasonable terms means that it is expected to offer a return of over 10%, well in excess of our cost of capital in its first full year and is expected to be significantly earnings enhancing in the first full year post completion. The value this will create for shareholders and the strategic transformation of our position in a key growth market, makes this an outstanding opportunity.”
• All debt financed transaction. Imperial expects to maintain its investment grade credit rating on its debt, underpinned by the strong cash flows from the acquired assets.
• Financially attractive deal that is expected to offer a return of over 10%, well in excess of Imperial’s cost of capital in its first full year and is expected to be significantly EPS enhancing in the first full year post completion.
The cigarette brands to be acquired in the US are as follows:
• Winston, a premium brand and current No.7 brand in the U.S. with 2.2% share of the U.S. market. Winston is the world No. 2 brand with strong inherent brand equity, which Imperial intends to rejuvenate with investment and focus.
• Maverick, a value brand with 2% U.S. market share and a strong position in key states. Maverick has been growing in recent years and has potential in the value segment alongside Imperial’s existing USA Gold brand.
• Kool, a menthol brand with 1.9% U.S. market share. Imperial intends to refocus and invest behind Kool as part of the enlarged portfolio.
• Salem, a menthol brand with 1.2% share of market.
These brands will combine with Imperial’s existing U.S. portfolio at Commonwealth-Altadis. Imperial’s existing U.S. brand portfolio currently accounts for a 3% share of the U.S. market, principally with USA Gold (share 1.2%), which is growing its presence in its target 19 states in the U.S. with a focused marketing and distribution strategy.
Historic Product Liability
The Winston, Maverick, Kool and Salem brands are to be acquired without historic product liabilities. An indemnity against such liabilities will be provided by Reynolds under the terms of the Transaction.
Following completion, Imperial will assume Original Participating Manufacturer obligations under the MSA on the acquired brands (other than the blu brand), and its affiliates expect to retain the grandfathered share benefit under the MSA for Imperial’s current U.S. brands.
Imperial will also acquire the e-cigarette business currently owned by Lorillard, which consists of blu, the No. 1 brand of e-cigarette in the U.S. market in measured retail distribution with a reported 45% value share of the market at retail. In the financial year to December 2013, blu had net revenues of $230 million. Lorillard has also recently acquired a UK business, SkyCig, through which it has begun to launch blu in the UK market. The e-cigarette market has been growing strongly in the US in recent years, and now exceeds $1.7 billion in total, including a growing online marketplace. Internationally, the e-cigarette market is in an early stage of development with considerable consumer interest suggesting opportunities with stronger branding and improved technology.
Other Assets to be Acquired
In addition to the brands, Imperial will acquire certain assets (the infrastructure) currently owned by Lorillard including the factory and office at Greensboro and 2,900 employees, including a substantial national sales force.
The Enlarged U.S. Business
The enhanced portfolio has a combined cigarette market share of approximately 10% of the U.S. cigarette market. Imperial also has a major presence in mass market cigars with its leading brands Backwoods, Dutch Masters and Phillies. Imperial’s premium cigar business is managed separately in the USA. The acquisition of blu will deliver immediate leadership of the US e-cigarette market at retail.
The U.S. market
The U.S. tobacco market is the second largest in the world (ex-China) by volume but the largest by profit pool (ex-China). Winston will be the main focus of Imperial’s U.S. strategy. Research in the U.S. has reinforced Imperial’s confidence that Winston can be rejuvenated. It is a leading global brand (global No.2), which has strong latent brand equity in the U.S. and has previously demonstrated its capability to grow supported by increased investment.
• blu will be the primary focus of the brand portfolio in the e-cigarette market, combining strong branded equity, blu technology and consumer recognition of blu with the know-how and expertise of Imperial’s subsidiary Fontem Ventures.
• Maverick will continue to be a focus in the value segment of the market, which is showing consistent growth.
• Kool, a menthol brand with distinct regional strength, will benefit from investment on a state-by-state basis to build on its existing equity.
• USA Gold will continue to be a focus in line with its rejuvenation strategy but with broader, national distribution.
The other brands in the portfolio will be largely run to maximize cash.
The move from a focused presence in 19 states to a material presence across the whole of the U.S. will significantly improve the ability of Imperial to compete and realize its ambitions to grow, the company said. Larger scale will support greater investment in sales technology. A cigarette portfolio across different price points, including mass market cigars and a national brand leader in e-cigarettes, will make the business much more important to retailers. More sales visits, stronger retailer relationships, better coverage of key accounts and the resulting ability to achieve greater shelf space, merchandising and point of sale presence will be a key difference post the Transaction and one that will support the increased brand investment.